Southwest Airlines 2008 Annual Report Download - page 79

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
All cash flows associated with purchasing and
selling derivatives are classified as operating cash
flows in the Consolidated Statement of Cash Flows.
The following table presents the location of pre-tax
gains and/or losses on derivative instruments within
the Consolidated Statement of Income.
2008 2007 2006
(In millions)
Fuel hedge (gains)
included in Fuel and oil
expense ............. $(1,106) $(686) $(634)
Mark-to-market impact
from fuel contracts
settling in future
periods—included in
Other (gains) losses,
net ................. (6) (219) 42
Ineffectiveness from fuel
hedges settling in future
periods— included in
Other (gains) losses,
net ................. 106 (51) 39
Realized ineffectiveness
and mark-to-market
(gains) or losses—
included in Other
(gains) losses, net ..... (80) (90) 20
Premium cost of fuel
contracts included in
Other (gains) losses,
net ................. 69 58 52
Also, the following table presents the fair values
of the Company’s remaining derivative instruments,
receivable amounts from settled/expired derivative
contracts, and the amounts of unrealized gains, net of
tax, in “Accumulated other comprehensive income
(loss)” related to fuel hedges within the Consolidated
Balance Sheet.
2008 2007
(In millions)
Fair value of current fuel contracts-
(Accrued liabilities)/Fuel
derivative contracts ........... $(246) $1,069
Fair value of noncurrent fuel
contracts-(Other deferred
liabilities)/Other assets ........ (746) 1,318
2008 2007
(In millions)
Due (to) from third parties for settled
fuel contracts-(Accrued liabilities)/
Accounts and other receivables . . . (16) 109
Net unrealized (losses) gains from
fuel hedges, net of tax-
Accumulated other comprehensive
income (loss) .................. (946) 1,220
The fair value of the derivative instruments,
depending on the type of instrument, was determined
by the use of present value methods or standard
option value models with assumptions about
commodity prices based on those observed in
underlying markets. Included in the above total net
unrealized losses from fuel hedges as of
December 31, 2008, are approximately $341 million
in net unrealized losses that are expected to be
realized in earnings during 2009. In addition, as of
December 31, 2008, the Company had already
recognized cumulative net gains due to
ineffectiveness and derivatives that do not qualify for
hedge accounting totaling $32 million, net of taxes.
These gains were recognized in 2008 and prior
periods, and are reflected in “Retained earnings” as
of December 31, 2008, but the underlying derivative
instruments will not expire/settle until 2009 or future
periods.
Interest rate swaps
Prior to 2008, the Company had entered into
interest rate swap agreements related to its $385
million 6.5% senior unsecured notes due 2012, its
$350 million 5.25% senior unsecured notes due 2014,
its $300 million 5.125% senior unsecured notes due
2017, and its $100 million 7.375% senior unsecured
debentures due 2027. The primary objective for the
Company’s use of these interest rate hedges was to
reduce the volatility of net interest income by better
matching the repricing of its assets and liabilities.
Under each of these interest rate swap agreements,
the Company pays the London InterBank Offered
Rate (LIBOR) plus a margin every six months on the
notional amount of the debt, and receives payments
based on the fixed stated rate of the notes every six
months until the date the notes become due. These
interest rate swap agreements qualify as fair value
hedges, as defined by SFAS 133. In addition, these
interest rate swap agreements qualify for the
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